I am on the board of a 501(c)(3) nonprofit that was formed about 5 years ago as the new "owner" of a local hospital. There have been few changes in the board since then. Now the board wants to change the bylaws to include terms for board members. How can we do this within standard 501(c)(3) legal constraints, with consideration of what's best for continuity and optimal compliance with the law? —From the Website.
You don’t have to worry about the Internal Revenue Service imposing any board term requirements under section 501(c)(3) of the Tax Code. There was talk about creating provisions for the size of nonprofit boards and other governance issues in the build-up to the significant changes in federal nonprofit tax law in 2006, but those suggestions were nixed before final passage. The governance rules are left to the states.
The general rule is that nonprofits may create specified terms for their directors and terms are one year unless another period is adopted in the bylaws. In practice, most terms are two, three, or four years, and the terms are staggered so that, as nearly as possible, an equal number of terms expire each year. Staggering the expiration of terms reduces the likelihood that there will be a major turnover in the board in any single year and thereby encourages continuity in governance responsibility. We tend to recommend three-year terms, although there is no magic in that number. Any reasonable number can be used.
Whether you adopt multiple year terms or go with a single year term for everyone, the next question for your board is to determine whether there should be a limit on the number of terms an individual may serve on the board. I don’t like term limits because I don’t like rules to designed only to protect me against myself. I usually lose the argument, however, and most of the commentators who pontificate on board governance believe term limits are essential to avoid stagnation of the board. I think that issue can be handled by a good governance committee that is willing to not recommend the reelection of a person who is not significantly helping the organization. (See Ready Reference Page: “Term Limits Are For Cowards”)
If you do provide term limits, you want to be sure that your bylaws state specifically how service in a partial term to fill a vacancy is to be counted toward the term limit. You could say that any partial term is disregarded, any partial term is counted as a full term, or anything in between. But you need to say something, or you are likely to have litigation by someone who doesn’t like your ad hoc answer when the question comes up in a real life situation. Organizations have litigated for years over that question, to the benefit of absolutely no one, when it could have been avoided by answering the question in advance.
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